May 28, 2010

Overseas markets were higher
overnight and U.S. futures indicate a flat to down opening. The volatility of
this week has ended up on the good side for us but May is still a downer for
the bulls. We don’t think anyone is going to spend a lot of ammo in the form of
dollars going into the long holiday weekend but...
*****

(MarketWatch) Personal income
outpaced consumer spending in April, the Commerce Department said Friday.
Personal incomes rose a seasonally adjusted 0.4% in April for the second
straight month. The gain was in line with economists’ forecasts. Real after-tax
incomes rose 0.5% in March, the largest increase since May 2009. Economists say
higher income will help make the recovery sustainable.

Consumer spending was flat in
April. This was weaker than forecast by economists surveyed by MarketWatch.
With incomes running faster than spending, the personal savings rate rose to
3.6% of disposable income from 3.1% in March. It was the highest savings rate
since January.

Inflation was tame. Core
inflation rose 1.2% in the past year, the slowest rate since last September.
*****

Three hours into the session
Fitch downgraded Spain to AA+ with a stable outlook and the markets tanked 1%.
Nuts. We added to shares
of Ford and BankAmerica on the plunge.
*****

After
dropping 1.5% on the Spain news the stock markets recovered to down 0.4% but
then with 5 minutes to go the program kids dropped the gong and the major
measures closed down 1% on the day. Breadth was negative and volume was active.
Gold was flat at $1215 as was oil with a $74 handle. European bourses closed
lower after being higher at midday.

*****

May 27, 2010

The big boys and girls are in volatility heaven as the markets this
week continued their schizophrenic daily up 2% down 2% trading activity. American Eagle met expectations but
warned of slightly lower second quarter results. The shares were pounded by
short sellers but that selling gave us an opportunity to increase positions at
attractive prices yesterday and today. We added Symantec, AT&T and Verizon on Tuesday when the major
market measures were down 3% in the morning.

Tuesday’s markets opened down 3% and then rallied in the
last few hours to close basically changed. That action suggested at least a
temporary bottom since the initial down opening represented a 14% correction
off the recent highs. Wednesday was up, then neutral, then down in the last
hour but this morning the futures are 2% higher as China said overnight that it
will continue to buy European bonds and anyone who says it won’t is a ninny.

When markets move lower we reevaluate positions and
usually sell the weaker to add stronger that have corrected. With this in mind we sold the Ford warrants for a
scratchy since we have a good holding in Ford. We also soldColdwater
since earnings come next Tuesday and we have no confidence that CWTR earnings
will be any better than Chico’s and AEO both of which were clobbered when they
announced. We used the Coldwater money to buy the AEO which is a stronger
company.*****

Jobless claims were in line at
460,000.
*****

We switched AT&T
to Verizon and added Walgreen to the same accounts. We also
purchased additional shares of Boston
Scientific and Symantec, both of
which are on multi year lows.*****

Most European bourses closed up
3% and more. Oil gained $3 to $74.20 and Gold lost $2 to 1212.
*****

The
S&P 500 was up almost 3% with the DJIA up 2% and the NAZZ gaining 4%.
Breadth on our screen was all green and 10/1 to the good on the NYSE and volume
was moderate as the only fly in the
ointment. As an example of how the markets are ruled by program trading-up
volume was 25 times down volume. In the good old days of the last century a
10/1 up versus down day 9 or the opposite) was a rare occurrence that usually
signaled a trend change. Now it only means that the big boys’ and girls’
computers were pushing stocks higher all day in mindless trading.

May 25, 2010

May 24, 2010

May 21, 2010

We will be traveling until next
Wednesday night and so our next post will be Thursday May 27. We will of course
be paying attention to the markets doings during our sojourn.

*****

Stocks are going to open lower
again as Asian market were down 2% and more overnight and European bourses are
in the red by a lesser percent. Oil has a $69 handle and Gold is off $10 at
$1170

(Bloomberg) -- Dell Inc., the world’s third-largest
personal-computer maker, reported first-quarter gross margins that missed some
analysts’ estimates after rising component costs eroded the benefit of a
rebound in corporate demand. Gross margin, excluding some items, was 17.6
percent, Dell said today in a statement. That’s below the 17.9 percent
anticipated on average by analysts, according to Maynard Um of UBS AG
in New York. Dell declined 5.7 percent in extended trading, after the report
was released.

The higher costs of some components, such as memory chips, cut into
profitability for the second-straight quarter even as Dell won new buyers for
PCs, which account for more than half of revenue. Dell is working to lessen its
dependence on computers by expanding into services, adding smartphones and
readying a tablet to take on Apple Inc. and Hewlett-Packard Co.

And it dropped 5% on this
excellent news because we ware in that kind of market. The reports focused 0.3%
miss on margins as the reason for disappointment.
*****

Carried Interest: the big boys and girls only
pay 15% tax on their earnings (while every one else in their bracket pays 35%)
and are crying over the possibility they may lose it.

(NYT) The threat of a tax hike on
the fees private equity managers earn moved closer to reality Thursday, as two
Democratic lawmakers said they would propose an increase on so-called carried
interest paid to executives at private equity firms, hedge funds and other
investment partnerships, Bloomberg News reported.

General partners at private
equity funds, who take a cut of the gains they earn for their investors in the
form of “carried interest,” have been paying federal taxes worth only 15
percent of that cut. By contrast, most people in the top tax bracket pay 35
percent on their income — soon to be 39.6 percent.

The bill, the American Jobs and
Closing Tax Loopholes Act of 2010, would, among other things, increase taxes
paid by investment fund managers on carried interest.

According to
The Hill, under the legislation carried interest for the first 2
years will be taxed at ordinary income and capital gains rates — a 50/50 split,
which amounts to a tax rate of roughly 30 percent. That split changes to 75/25
after 2 years, which amounts to a 35 percent rate.

The industry was quick to let its
displeasure be known.

Douglas Lowenstein, president of
the Private Equity Council, hit back the proposal.

“At this time of great market
uncertainty, now is not the time to upend more than 50 years of partnership tax
law characterizing carried interest as a capital gain,” he told The Hill. “This
punitive, 157 percent tax hike on growth investment by real estate, venture,
private equity and other firms will hurt those companies that are most
desperately in need of capital to sustain or create jobs and drive growth.”

Lawmakers aim to put the
proposals, introduced by Senator Max Baucus, chairman of the Senate Finance
Committee, and Representative Sander Levin, chairman of the House Ways and
Means Committee, to a vote in the House by Friday, Bloomberg said.
*****

And we clap with one hand:

The Senate voted 59-39 to pass a
sweeping overhaul of how the government regulates banks and Wall Street. It
will now need to be reconciled with a version passed by the House of
Representatives and signed by the
president before becoming law. The legislation, in broad terms, is designed to
close the regulatory gaps and end the speculative trading practices that
contributed to the 2008 financial-market crisis, which prompted federal
regulators to engineer a series of taxpayer bailouts of financial institutions.
*****

But the financials are happy with
the news of the financial bill’s passage and most are higher. Would they be if
the Bill had any real reform?
*****

Today will be the second gap
opening n a row. For the same reason that gaps on the upside have to be filled,
so do gaps on the downside.
*****

After one half hour of trading
this morning’s down gap has been filled, as stocks turned positive for a
nanosecond on the games of the HFT big boys and girls.But that still leaves yesterday’s gap up at
1110 on the S&P 500 which is now resistance and was the bottom number on
the upside gap of May 10.
*****

We repurchased Dell
in some accounts $1 lower than we
sold it yesterday. And we also repurchased Boston
Scientific in some accounts at10% lower
than we sold a few weeks ago.*****

University of Illinois
trustees voted Thursday to raise tuition 9.5 percent for freshmen on the same
day they approved the salary and other compensation for the new president. Incoming
president Michael Hogan, is set to earn $620,000 a year up from the picayune
$450,000, paid to his predecessor.

*****

Stocks are up 1.5% at 11 am after
opening almost 1% lower. Today is the first up day –except for May 10- where
the volume is as active on an up day as it has been on most the large down days
we have been experiencing. That is a positive if the gains hold and of course
negative if the gains don’t hold. With the big boys and girls lurking we aren’t
spending the gains.
*****

More anecdotal stories like this from the NY Post- that bastion of
intelligent writing- are needed to put in a bottom:

Veteran hedge fund strategists were almost unanimous in their warnings
of likely worst-case scenarios, and were piling up hoards of cash to withstand
any upheavals in the coming months.

Their fears, which had been muted in Wall Street's recent spate of
hopeful stock rallies, grew louder following yesterday's stock rout that wiped
out the year's entire gains in stocks and yanked the lid off a global economic
rot underneath. "It's a disaster, to be frank," said one fund chief.
"Odds are getting very high for a massive event this summer. There are red
flags everywhere you look." Several hedge fund executives said Europe's
debt crisis, which is eroding the euro, was just one of many danger zones
threatening to drag down the US outlook. Economies of China and Japan also were
at the edge of trouble and could get pushed over along with Europe's, they
said. "This is going to get worse before it gets better," said one
source, who, like most of his colleagues, was reluctant to have such dire
outlooks attributed to him. "The world is going through horrendous changes
-- it's very difficult to make long-term investments," said Goliath's
chief Murphy. Meanwhile, traders raced to place bets to protect their shaky
positions, tripling such transactions across all the exchange-traded funds.

And—by the by he is talking his
book- but he gets a big stage (CNBC and Bloomberg TV) to propound his views:

Bloomberg) -- The Standard &
Poor’s 500 Index’s 12 percent decline from April’s high may worsen amid
concern that Europe’s debt crisis will derail global growth, said Mohamed
A. El-Erian, chief executive officer of Pacific Investment Management Co.
“This is not a typical retracement,” El-Erian, 51, whose firm runs the world’s
biggest bond fund, wrote in an e-mail to Bloomberg News. “We are in uncharted
waters on account of several issues, including what is going on in Europe and
other important structural regime changes. In economic terms, European
developments are unambiguously bad for global growth.”
*****

And: Nouriel Roubini on CNBC May 20 with market already down 3% on
day and 12% from high said stocks to lose another 20 percent in value saying
we’re in for a “fiscal train wreck.”

The fact bailout packages are growing exponentially in size and scope
is indicative of serious problems, according to Roubini. “They’re going to wake
up in America within the next three years and say: ‘this is unsustainable.”

“We had a Bear Stearns bailout of $40 billion; a Fannie and Freddie
bailout of $200 billion; a TARP program worth $700 billion and now an EU
bailout worth $1 trillion. So ‘trillion’ has become the new normal.”

He repeated his view that the Greek debt crisis was “just the tip of
the iceberg,” and that the PIIGS (Portugal, Ireland, Italy, Greece, Spain)
problems did not only revolve around excessive debt levels, but a lack of
competitiveness and the sharp appreciation of the euro from 2006 – 2008.

“These economies were already losing market share to Asia,” where the
costs of labor and manufacturing are significantly reduced compared to the
Eurozone. …

http://www.taylormarsh.com/

*****

And a more reasoned voice: Despite
a chorus of voices claiming otherwise, we aren’t Greece. We are, however,
looking more and more like Japan. [...} ... Will the worst happen? Not
necessarily. Maybe the economic measures already taken will end up doing the
trick, jump-starting a self-sustaining recovery. Certainly, that’s what we’re
all hoping. But hope is not a plan. - Paul Krugman*****

The
Major measures closed on their highs for the day after program shenanigans in
the last hour had the DJIA up 50 and down 25 several times before pushing
stocks higher in the last fifteen minutes of trading. This mini rally may just
be a move to close the gap of yesterday. Action next week will tell. Volume was
active and Breadth was very positive.
*****

May 20, 2010

This morning is going to be down with Asia
and Europe lower overnight. Oil has $67 handle and U.S. futures look to open
lower by 1.5% and tonight and tomorrow are Triple Witching. Hang on.

*****

Jobless claims 471,000 which was
higher than expected and futures are now down 2%.
*****

(NYT) Informants who turn in tax
cheats have to wait years to get their share of any reward from the I.R.S.’s recently expanded
whistle-blower program. So hedge funds, private equity groups and
other big investors are offering an alternative. They are essentially agreeing
to buy a percentage of those future payouts in exchange for a smaller amount
upfront to the whistle-blowers.

(The hedge fund hope it stays in
business long enough to collect.)
*****

Breadth in the NYSE is 30/1 to the downside. Only other
time it was that bad was Crash Day 1987,*****

European markets dropped sharply
as sentiment continued to be hit by concerns about the continent's debt crisis
and figures showing an unexpected increase in U.S. jobless claims last week.
Oil was down $1.86 at $68.01 and Gold dropped $10 to $1185.
*****

We sold Dell ahead
of tonight’s earnings since all our stocks have been massacred by earnings even when they were
good. High Frequency trading ruled the day but Chico’s closed higher which shows that there are levels that elicit
investment. Watching the market all day it looked to us like our stocks would
rally if the HFT programs went away. That isn’t going to occur but that is our
observation. Meanwhile we are comfortable adding a few shares every day of the
now 7 day down turn and will continue to do so. Actually we bought an equal
number of Coldwater shares for the Dell we sold which raised cash but also
bought a stock we want to hold.

It’s tough to
weather this type of selling even when we predicted it and we also still believe
it is a correction and not a prelude to a crash and so are buying into it. We
have plenty of cash left.

*****

Stocks
closed on their lows with the DJIA down 375 and the S&P 500 down 3.5%.
Volume was active and breadth was 100% negative on our screens and 30/1
negative on the NYSE. Thank you program traders. And tomorrow is another day.

*****

May 19, 2010

The gap created by the May 10
Monday 4% higher opening was filled in overnight trading but that just means
that the markets are free to do their thing. Without the gap being filled a
sustained move to the upside was not possible. The markets are now down 10%
from their highs and ideally another 5% to 10% down would revive the fear and
loathing that is need to erase the greed and master of the universe mindset that the rally since March 2009 has
created. The 200 day moving average on the S&P 500 is 1100 and that is a
logical bounce level.

*****

(Reuters) - Women's apparel retailer Chico's FAS Inc said its quarterly profit more than doubled, helped
by lower markdowns and higher initial markups. Chico's said on Wednesday that
net income rose to $35.4 million, or 20 cents per share, in the first quarter
ended on May 1 from $14.5 million, or 8 cents per share, a year earlier. The
company, operator of the Chico's and White House/Black Market chains, has
managed to add more fashionable items for its mature women shoppers and turn
around its frumpy image. Chico's said its gross margin increased 1.7 percentage
points to 58.5 percent as its outlet stores benefited from selling a higher
proportion of made-for-outlet product. Net sales rose to $481.6 million from
$410.6 million a year earlier. The
Lemley family women gave their approval to Chico’s current offerings over the
Mothers’ Day weekend.

Chico’s is down 15% on the news and we are adding shares.

*****

(MarketWatch) European shares
traded sharply lower, with banks hit hard across the continent, while the euro
fell to a fresh four-year low following Germany's curb on short-selling. Asia
markets also ended broadly lower after the announcement, with exporters that
sell their wares in Europe among the biggest fallers as the euro tumbled.

Consumer prices in the U.S. fell 0.1% on
a seasonally adjusted basis in April as energy, housing, auto and apparel
prices declined, the Labor Department reported. The consumer price index is up
2.2% in the past year. The core CPI --
which excludes food and energy prices -- was unchanged in April, lowering the
year-over-year increase in core inflation to 0.9%, the lowest rate since
January 1966.(The only benefit of a severe recession?)
Economists surveyed by MarketWatch had forecast a 0.1% drop in the headline CPI
and a 0.1% gain in the core rate.
*****

The SEC continues to try and reinvent the wheel when all
it has to do is re-impose the uptick rule. But re-imposing the uptick rule
would mean that High Frequency Computer Trading would not be possible and that
would hurt the big boys and girls and the SEC and NYSE who make money from
computer trading as well as Goldman and the other big banks who sell computer
platforms for HFT traders to use.

The U.S. Securities and Exchange Commission Tuesday proposed a trial of
a system intended to head off the kind of chaos Wall Street experienced May 6. SEC
Chairwoman Mary Shapiro said a system of individual circuit breakers on all
stocks in the Standard & Poor's 500-stock index "would help to limit
significant volatility," The New York Times reported. Schapiro told
lawmakers on Capitol Hill May 11 regulators were working on establishing a fair
process for evaluating trade. The circuit breakers -- which would pause trading
in a stock if its price shifts by 10 percent or more within in a
5-minute span -- would be subject to a trial following a 10-day public comment
period. The trial would end Dec. 10, the SEC said.
*****

The S&P covered
the gap in today’s trading on top of the gap coverage in overnight futures
trading which is fine with us. We expected this decline and we think it has
further to go. But we also think that the stocks we own are good values and we
are adding to them as the decline occurs. This is a much needed- and expected
by us- correction, not the end of the world. The compute trading exacerbates
down moves (and up moves of days gone by) as with Chico’s today where the flash traders are having a field day front running ordinary folks buy/sell
orders but at the end of the day or week or month values will be recognized. We
are adding gingerly since the big boys and girls are in control of minute to
minute and day to day trading.

*****

CNBC is interviewing Hedge Fund
Honchos at the Hedge Fund Summit in Las Vegas. That is a fitting place for the
summit to be held.
*****

(MarketWatch) European stock markets
closed lower amid uncertainty surrounding the fragility of the euro-zone
economy, following the decision of German authorities to ban some forms of
speculative trading. Still, the euro bounced off four-year lows late in the
session amid talk that European authorities would look to correct these sharp
falls. Oil was up $1.75 at $71.45 and Gold lost $23 to $1190.*****

The S&P 500 came back from down 15
points to end down 3. The DJIA was down a bit more but well above its lows.
Breadth on the stocks on our machine was negative. We are no longer going to
give NYSE breadth because so many non common stocks trade on the NYSE now.
Volume was active. And tomorrow is tomorrow.
*****

High Frequency
Trading and filling customer orders as principal instead of as a broker for
commission are two of the reasons Goldman makes a profit every day while its
clients loose on 7 of 9 trading ideas for this year. Moreover in Bloomberg
article below the CFO of Goldman admits that another reason Goldman makes money
every day that is that it interpositions itself between its client as a
principal to fill client orders.If
Goldman acted as a broker for its clients instead of as a principal it would
still make money (but much less) on every trade since it would have to disclose
to its clients how much money it was making on the essentially risk free trade.

We are printing both articles and pleas take the time to
read and become outraged as we are. The
important part of the story is that the exchanges –and the SEC- make money from
the flash trading.

While the SEC is busy investigating Goldman Sachs, it might want to
look into another Goldman-dominated fraud: computerized front running using
high-frequency trading programs.

Market commentators are fond of talking about “free market capitalism,”
but according to Wall Street commentator Max Keiser, it is no more. It has
morphed into what his TV co-host Stacy Herbert calls “rigged market
capitalism”: all markets today are subject to manipulation for private gain.

Keiser isn’t just speculating about this. He claims to have invented
one of the most widely used programs for doing the rigging. Not that that’s
what he meant to invent. His patented program was designed to take the
manipulation out of markets. It would do this by matching buyers with sellers
automatically, eliminating “front running” – brokers buying or selling ahead of
large orders coming in from their clients. The computer program was intended to
remove the conflict of interest that exists when brokers who match buyers with
sellers are also selling from their own accounts. But the program fell into the
wrong hands and became the prototype for automated trading programs that
actually facilitate front running.

Also called High Frequency Trading (HFT) or “black box trading,”
automated program trading uses high-speed computers governed by complex
algorithms (instructions to the computer) to analyze data and transact orders
in massive quantities at very high speeds. Like the poker player peeking in a
mirror to see his opponent’s cards, HFT allows the program trader to peek at
major incoming orders and jump in front of them to skim profits off the top.
And these large institutional orders are our money -- our pension funds, mutual
funds, and 401Ks.

When “market making” (matching buyers with sellers) was done strictly
by human brokers on the floor of the stock exchange, manipulations and front
running were possible but were against the rules, which were strictly enforced.
Front running by computer, using complex trading programs, is an entirely
different species of fraud. A minor potential for cheating has morphed into a
monster. Keiser maintains that computerized front running with HFT has become
the principal business of Wall Street and the primary force driving most of the
volume on exchanges, contributing not only to a large portion of trading
profits but to the manipulation of markets for economic and political ends.

The “Virtual Specialist”: the
Prototype for High Frequency Trading

Until recently, most market making was done by brokers called
“specialists,” those people you see on the floor of the New York Stock Exchange
haggling over the price of stocks. The job of the specialist originated over a
century ago, when the need was recognized for a system for continuous trading.
That meant trading even when there was no “real” buyer or seller waiting to
take the other side of the trade.

The specialist is a broker who deals in a specific stock and remains at
one location on the floor holding an inventory of it. He posts the “bid” and
“ask” prices, manages “limit” orders, executes trades, and is responsible for
managing the uninterrupted flow of orders. If there is a large shift in demand
on the “buy” side or the “sell” side, the specialist steps in and sells or buys
out of his own inventory to meet the demand, until the
gap has narrowed.

This gives him an opportunity to trade for himself, using his inside
knowledge to book a profit. That practice is frowned on by the Securities
Exchange Commission (SEC), but it has never been seriously regulated, because
it has been considered necessary to keep markets “liquid.”

Keiser’s “Virtual Specialist Technology” (VST) was developed for the
Hollywood Stock Exchange (HSX), a web-based, multiplayer simulation in which
players use virtual money to buy and sell “shares” of actors, directors,
upcoming films, and film-related options. The program determines the true
market price automatically, by comparing “bids” with “asks” and weighting the
proportion of each. Keiser and HSX co-founder Michael Burns applied for a
patent for a “computer-implemented securities trading
system with a virtual specialist function” in 1996, and U.S. patent no. 5960176
was awarded in 1999.

But things went awry after the dot.com crash, when Keiser’s company HSX
Holdings sold the VST patent to investment firm Cantor Fitzgerald, over his
objection. Cantor Fitzgerald then put the part of the program that would have
eliminated front-running on ice, just as drug companies buy up competing
patents in order to take them off the market. Instead of preventing
front-running, the program was altered so that it actually enhanced that
fraudulent practice. Keiser (who is now based in Europe) notes that this sort
of patent abuse is illegal under European

Intellectual
Property law.

Meanwhile, the design of the VST program remained on display at the
patent office, giving other inventors ideas. To get a patent, applicants must
list “prior art” and then prove that their patent is an improvement in some
way. The listing for Keiser’s patent shows that it has been
referenced by 132 others involving automated program trading or HFT.

Since then, HFT has quickly come to dominate the exchanges. High
frequency trading firms now account for 73% of all U.S. equity trades, although
they represent only 2% of the approximately 20,000 firms in operation.

In 1998, the SEC allowed online electronic communication networks, or
alternative trading systems, to become full-fledged stock exchanges.
Alternative trading systems (ATS) are computer-automated order-matching systems
that offer exchange-like trading opportunities at lower costs but are often
subject to lower disclosure requirements and different trading rules. Computer
systems automatically match buy and sell orders that were themselves submitted
through computers. Market making that was once done with a “specialist’s book”
-- something that could be examined and audited -- is now done by an unseen,
unaudited “black box.”

For over a century, the stock market was a real market, with live
traders hotly bidding against each other on the floor of the exchange. In only
a decade, floor trading has been eliminated in all but the largest exchanges,
such as the New York Stock Exchange (NYSE); and even in those markets, it now
co-exists with electronic trading.

Alternative trading systems allow just about any sizable trader to
place orders directly in the market, rather than routing them through
investment dealers on the NYSE. They also allow any sizable trader with a
sophisticated HFT program to front run trades.

Flash Trades: How the Game Is
Rigged

An integral component of computerized front running is a dubious
practice called “flash trades.” Flash orders are permitted by a regulatory
loophole that allows exchanges to show orders to some traders ahead of others
for a fee. At one time, the NYSE allowed specialists to benefit from an advance
look at incoming orders; but it has now replaced that practice with a “level
playing field” policy that gives all investors equal access to all price
quotes. Some ATSs, however, which are hotly competing with the established
exchanges for business, have adopted the use of flash trades to pull trading
business away from the exchanges. An incoming order is revealed (or flashed) to
a trader for a fraction of a second before being sent to the national market
system. If the trader can match the best bid or offer in the system, he can
then pick up that order before the rest of the market sees it.

The flash peek reveals the trade coming in but not the limit price –
the maximum price at which the buyer or seller is willing to trade. This is
what the HFT program figures out, and it is what gives the high-frequency
trader the same sort of inside information available to the traditional market
maker: he now gets to peek at the other player’s cards. That means
high-frequency traders can do more than just skim hefty profits from other
investors. They can actually manipulate markets.

How this is done was explained by Karl Denninger in an insightful post
on Seeking Alpha in July 2009:

“Let’s say that there is a buyer willing to buy 100,000 shares of BRCM
with a limit price of $26.40. That is, the buyer will accept any price up to
$26.40. But the market at this particular moment in time is at $26.10, or
thirty cents lower.

“So the computers, having detected via their ‘flash orders’ (which
ought to be illegal) that there is a desire for Broadcom shares, start to issue
tiny (typically 100 share lots) ‘immediate or cancel’ orders - IOCs - to sell
at $26.20. If that order is ‘eaten’ the computer then issues an order at
$26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no
bite and the order is immediately canceled.

“Now the flush of supply comes at, big coincidence, $26.39, and the
claim is made that the market has become ‘more efficient.’

“Nonsense; there was no ‘real seller’ at any of these prices! This
pattern of offering was intended to do one and only one thing -- manipulate the
market by discovering what is supposed to be a hidden piece of information --
the other side’s limit price!

“With normal order queues and flows the person with the limit order
would see the offer at $26.20 and might drop his limit. But the computers are
so fast that unless you own one of the same speed you have no chance to do this
-- your order is immediately ‘raped’ at the full limit price! . . . [Y]ou got
screwed for 29 cents per share which was quite literally stolen by the HFT
firms that probed your book before you could detect the activity, determined
your maximum price, and then sold to you as close to your maximum price as was
possible.”

The ostensible justification for high-frequency programs is that they
“improve liquidity,” but Denninger says, “Hogwash. They have turned the market
into a rigged game where institutional orders (that’s you, Mr. and Mrs. Joe
Public, when you buy or sell mutual funds!) are routinely screwed for the
benefit of a few major international banks.”

In fact, high-frequency traders may be removing liquidity from the
market. So argues John Daly in the Canadian Globe and Mail, citing Thomas
Caldwell, CEO of Caldwell Securities Ltd.:

“Large institutional investors know that if they start trying to push
through a large block of shares at a certain price – even if the block is
broken into many small trades on several ATSs and markets -- they can trigger a
flood of high-frequency orders that immediately move market prices to the
institution’s disadvantage. . . . That’s why institutions have flocked to
so-called dark pools operated by ATSs such as Instinet, and individual dealers
like Goldman Sachs. The pools allow traders to offer prices without publicly
revealing their identities and tipping their hand.”

Because these large, dark pools are opaque to other investors and to
regulators, they inhibit the free and fair trade that depends on open and
transparent auction markets to work.

The Notorious Market-Rigging
Ringleader, Goldman Sachs

Tyler Durden, writing on Zero Hedge, notes that the HFT game is
dominated by Goldman Sachs, which he calls “a hedge fund in all but FDIC
backing.” Goldman was an investment bank until the fall of 2008, when it became
a commercial bank overnight in order to capitalize on federal bailout benefits,
including virtually interest-free money from the Fed that it can use to
speculate on the opaque ATS exchanges where markets are manipulated and
controlled.

Unlike the NYSE, which is open only from 10 am to 4 pm EST daily, ATSs
trade around the clock; and they are particularly busy when the NYSE is closed,
when stocks are thinly traded and easily manipulated. Tyler Durden writes:

“[A]s the market keeps going up day in and day out, regardless of the
deteriorating economic conditions, it is just these HFT’s that determine the overall
market direction, usually without fundamental or technical reason. And based on
a few lines of code, retail investors get suckered into a rising market that
has nothing to do with green shoots or some Chinese firms buying a few hundred
extra Intel servers: HFTs are merely perpetuating the same ponzi market
mythology last seen in the Madoff case, but on a massively larger scale.”

HFT rigging helps explain how Goldman Sachs earned at least $100
million per day from its trading division, day after day, on 116 out of 194
trading days through the end of September 2009. It’s like taking candy from a
baby, when you can see the other players’ cards.

Reviving the Free Market

So what can be done to restore free and fair markets? A step in the
right direction would be to prohibit flash trades. The SEC is proposing such
rules, but they haven’t been effected yet.

Another proposed check on HFT is a Tobin tax – a very small tax on every
financial trade. Proposals for the tax range from .005% to 1%, so small that it
would hardly be felt by legitimate “buy and hold” investors, but high enough to
kill HFT, which skims a very tiny profit from a huge number of trades.

That could work, but it might take a tax larger than .005% or even .1%.
Consider Denninger’s example, in which the high-frequency trader was making not
just a few pennies but a full 29 cents per trade and had an opportunity to make
this sum on 99,500 shares (100,000 shares less 5 100-lot trades at lesser
sums). That’s a $28,855 profit on a $2.63 million trade, not bad for a few
milliseconds of work. Imposing a .1% Tobin tax on the $2.63 million would
reduce the profit to $26,225, but that’s still a nice return for a trade that
takes less time than blinking. A full 1%, on the other hand, would pretty well
wipe out the profit and kill the trade.

Better yet, however, would be to fix the problem at its source -- the
price-setting mechanism itself. Keiser says this could be done by banning HFT
and installing his VST computer program in its original design in all the
exchanges. The true market price would then be established automatically,
foreclosing both human and electronic manipulation. He notes that the
shareholders of his former firm have a good claim for voiding out the sale to
Cantor Fitzgerald and retrieving the program, since the deal was never
consummated and the investors in HSX Holdings have never received a penny for
the sale.

There is just one problem with their legal claim: the paperwork proving
it was shipped to Cantor Fitzgerald’s offices in the World Trade Center several
months before September 2001. Like free market capitalism itself, it seems, the
evidence has gone up in smoke.

Ellen Brown developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt, her latest of eleven books,
she turns those skills to an analysis of the Federal Reserve and “the money
trust.” She shows how this private cartel has usurped the power to create money
from the people themselves, and how we the people can get it back. Her websites
are www.webofdebt.com, www.ellenbrown.com, and www.public-banking.com.

*****

Goldman Sachs Hands Clients Losses in ‘Top Trades’

(Bloomberg) -- Goldman Sachs
Group Inc. racked up trading profits for itself every day last quarter. Clients
who followed the firm’s investment advice fared far worse.

Seven of the investment bank’s
nine “recommended top trades for 2010” have been money losers for investors who
adopted the New York-based firm’s advice, according to data compiled by
Bloomberg from a Goldman Sachs research note sent yesterday. Clients who used
the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4
percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound
against the New Zealand dollar.

The struggles for analysts at
Goldman Sachs, which is fighting a fraud lawsuit from U.S. regulators who
accuse the company of misleading investors in a mortgage-linked security, show
the difficulty of predicting market movements as widening budget deficits, a
fragile global economic recovery and tighter financial regulations increase
volatility. Stock and currency fluctuations rose to the highest in a year this
month as Europe pledged about $1 trillion to stop a debt crisis in the region.

“This says that Goldman’s guys
are only human,” said Axel Merk, who oversees $500 million as president and
chief investment officer of Merk Investments LLC in Palo Alto, California. “No
one is always right. There are a lot of cross currents in this market.”

Goldman Sachs’s trading profits
come from capturing bid- offer spreads when its traders act as intermediaries
for clients, Gary Cohn, the firm’s president and chief operating officer, said
last week in New York. Proprietary trading isn’t a main driver of earnings, he
said.

The trade advice for customers is
distributed by Goldman Sachs’s global markets economic research group. It
tracks the performance of the trades in a daily research note. The time period
of the recommendations is 12 months. The performance this year is a reversal
from 2009, when nine of Goldman Sachs’s 11 trading recommendations made money.
Investors saw a 22 percent return owning Chinese stocks and a 12 percent gain
buying the British pound versus the dollar, according to a Goldman Sachs note
on Dec. 1.

Goldman Sachs analysts made eight
trade recommendations for this year in December, including telling clients to
buy the British pound against the New Zealand dollar. On April 1, Goldman Sachs
added a ninth “top” trade, telling clients to buy Chinese stocks listed in Hong
Kong and predicting the Hang Seng China Enterprises Index would rise 19 percent
to 15,000.

Since then, the gauge has slid
9.4 percent to 11,426.18. The Shanghai Composite index has entered a bear
market, losing about 21 percent this year. That’s the third biggest decline in
the world after Greece and Cyprus. The decline accelerated this month on
concern Greece, Spain and Portugal will struggle to finance their budget
deficits and dismantle the euro.

The Chinese stock recommendation
was made by a group led by Dominic Wilson, a senior Goldman Sachs economist in
New York. Wilson cited inexpensive valuations and “robust” economic growth. He
also said investors have already factored in the risk of higher interest rates
in China.

Wilson wasn’t available to
comment because he was out of the office traveling, according to an e-mail.

“Emerging markets appear superior to the
developed world, but the market isn’t trading that relationship,” said Eric Fine,
who manages Van Eck Associates Corp.’s G-175 Strategies emerging-market hedge
fund. “It may be that some assets are mispriced, but if the market starts to
discount the end point of the game, such as the collapse of the euro, it’s not
that mispriced.”

Analysts at Goldman Sachs
recommended investors exit two trades in February, one involving interest-rate
swap rates in the U.K. and another advising clients to buy credit-default swaps
in Spain and sell similar contracts in Ireland. The first trade had a potential
loss of 24 basis points and the other had a return of 2.9 percent, according to
figures issued in the appendix of the research note in February.

Owning currencies that are tied
to growth is the only remaining trade that has increased in value this year,
according to Goldman Sachs. The Goldman Sachs FX Growth Index has climbed 3.4
percent since the firm made the recommendation in December.

Goldman Sachs makes more money
from trading than any other Wall Street firm. In the first quarter, the bank’s
$7.39 billion in revenue from trading fixed-income, currencies and commodities
dwarfed the $5.52 billion made by its closest rival, Charlotte, North Carolina-based
Bank of America Corp. In equities, Goldman Sachs’s $2.35 billion in revenue was
about 50 percent higher than its nearest competitor.

Cohn told investors at a May 11
conference in New York that the firm lost money on only 11 days in the last 12
months. He said that uncanny streak of success refutes suspicions that the bank
depends on proprietary bets with its own money.

“It is implausible that a
proprietary-driven business model could be right 96 percent of the time,” Cohn
said. Instead, he said the “simple answer” is that the firm makes money by
capturing bid-offer spreads when acting as an intermediary for client trades.

Goldman Sachs executives have
grappled before with questions about whether they’re better at making money for
the firm than for their clients, according to an internal e-mail dated Sept.
26, 2007, that was released by a U.S. Senate subcommittee last month.
*****

May 18, 2010

Unfortunately stocks are going to open higher
today as markets around the world have rallied overnight. We say unfortunately
because the gap at 1111 needs to be closed before any meaning upside action can
occur.

Several clients have asked why we have repurchased some
stocks after saying we were going away in May. We sold because we expected a correction.
The pullback and Crash of May 6 suggests that maybe a correction occurred. The
10% down move from the high was the size of the two previous corrections since
the markets rallied off the Mach 2009 low. But the gap up opening on Monday May
10 probably needs to be filled before any substantial rally can occur.

Our current scenario is for a rally after the gap is
closed into mid June and/or maybe the end of June. We think it will be
sufficient to allow us to make a few dollars. If we are wrong and the
correction continues, we have plenty of cash to take advantage of a decline. And
the stocks we own are stocks we are comfortable owing and adding to. Remember
that we are of the opinion that what is occurring is a correction and not the
prelude to a Crash. As we wrote yesterday; after a Crash as occurred in 2009
folks look for further Crash every time
the markets pullback.

The economy is slowly recovering. Times are not wonderful
but the reality is that 90% of folks still have jobs and job losses are being
offset by job gains for the first time in two years. The market rally had gone
too far and a pullback was needed. That is what is occurring. In a perfect
world the pullback would amount to 15% to 20% and create enough fear to create
a good bottom. That may still occur but for now we think a tradable rally may
ensue.*****

This is investing???? And we
thought we traded a lot.

Over the last decade, these high-tech operators have become sort of a
shadow Wall Street — from New Jersey to Kansas City, from Texas to Chicago.
Depending on whose estimates you believe, high-frequency traders account for 40
to 70 percent of all trading on every stock market in the country. Some of the
biggest players trade more than a billion shares a day.

These are short-term bets. Very short. The founder of Tradebot, in
Kansas City, Mo., told students in 2008 that his firm typically held stocks for
11 seconds. Tradebot, one of the biggest high-frequency traders around, had not
had a losing day in four years, he said.

But some in Washington wonder if
ordinary investors will pay a price for this sort of lightning-quick trading. Unlike old-fashioned specialists on the New
York Stock Exchange, who
are obligated to stay in the market whether it is rising or falling,
high-frequency traders can walk away at any time.

Housing starts rose to 672,000 in April, after being revised up again
for the previous month. This follows a relatively upbeat report from home
builders yesterday, and a fairly dramatic drawdown in the level of inventories.
Indeed, the actual stock of new homes on the market is now at its lowest level
since the 1970s.

The extension of homebuyer tax credits to April 30, 2010, record-low
mortgage rates and large tax refunds to beleaguered builders contributed to the
gains.

That said, it is important to put these numbers into perspective.
Starts were running above two million units during the boom, and demographic
trends - which suggest starts - should be closer to 1.3 million units per year
(i.e., the level of activity is still exceedingly low). More importantly,
momentum in the housing market appears to be abating, as permits plummeted more
than 11 percent, suggesting that there is little in the pipeline to keep this
housing market humming now that the tax credits have expired.

Separately, the Producer Price Index (PPI) dropped 0.1% in April,
mostly on a decline in energy prices. Embedded in the decline was also a drop
in food prices - mostly fresh and dry vegetables - which is the first drop
since July 2009.

The Bottom Line: The recovery continues but remains on fragile ground,
particularly in housing - the sector that got us into trouble in the first
place. Moreover, inflationary pressures remain extremely contained, which we
will see further validated in tomorrow's release of the Consumer Price Index
(CPI) data. This, coupled with the slowdown in growth that will no doubt
result from the recent turmoil in Europe, will keep the Fed from raising rates
well into 2011, and could even prompt additional quantitative easing in the near-term,
as the Fed moves to keep financial markets stable.

*****

After an hour of trading the
markets look to be rolling over after opening almost 1% higher. That is good
since more downside work is needed.*****

Ok kids, the DJIA is popping
up 20 and down 50 every 15 minutes as the computer geeks play their games.
Allowing this type of trading is as bad as removing the uptick rule and we all
know where that led to in late 2008 and early 2009.

*****

(Bloomberg) -- Germany’s BaFin
financial-services regulator said that it will introduce a temporary ban on
naked short-selling and naked credit-default swaps of euro-area government
bonds starting at midnight.

The ban will also apply to naked
short selling in shares of 10 banks and insurers that will last until March 31,
2011, BaFin said today in an e-mailed statement.

BaFin said it was taking the step
because of “exceptional volatility” in euro-area bonds. “Massive” short-selling
was leading to excessive price movements which “could endanger the stability of
the entire financial system.”

The move came as Chancellor Angela Merkel’s
coalition seeks to build momentum on financial-market regulation with lower-
house lawmakers due to begin debating a bill tomorrow authorizing Germany’s
contribution to a $1 trillion bailout plan to backstop the euro. Merkel said
earlier today that she will press the Group of 20 to bring in a financial
transactions tax.

“You cannot imagine what broke
lose here after Bafin’s announcement,” Johan Kindermann, a capital markets
lawyer at Simmons & Simmons in Frankfurt, said in an interview. “This will
lead to an uproar in the markets tomorrow. Short-sellers will now, even
tonight, try to close their positions at markets where they can still do so --
if they find any possibilities left at all now.”

Europe closed higher as did Asia. Oil had been up $2 but ended down at
under $70 while Gold lost $5 to 1223. The euro/dollar gave up its gains as U.S.
stocks skidded and closed on a four year low.

*****

The DJIA lost 1% and the S&P 500 closed
down 1.5%. It should close the less than
1% of the gap remaining tomorrow morning – if it doesn’t do so in overnight
trading- and then... Breath was 3/1 negative and volume was brisk.

The computers are ruling share prices and no good will come of this. The
most telling comment in the article we linked to above about computer trading
was this:

The computers
trade in and out of individual stocks, indexes and exchange-traded
funds, or E.T.F.’s, all day long. Mr.
Narang, for the most part, has no idea which stocks Tradeworx is buying or
selling. Showing a computer chart to a visitor, Mr. Narang zeroes in on one stock that had recently been a winner for
the firm. Which stock? Mr. Narang clicks on the chart to bring up the ticker
symbol: NETL. What’s that? Mr. Narang clicks a few more times and answers
slowly: “NetLogic Microsystems.” He shrugs. “Never heard of it,” he says.

*****

May 17, 2010

U.S. futures are higher this
morning after trading lower overnight. Down this morning would be better than
up but Mrs. Market makes her own decisions. China was
5% lower overnight supposedly on fears that the government has pressed to hard
on the housing brakes. European bourses are higher and that may be why U.S.
markets are higher. We don’t think the optimism will last through the first
hour of trading. There is more work on the downside before a real rally will
begin.
*****

The euro is at $1.23, a four year
low against the dollar. We don’t understand the market’s consternation with the
dollar gaining against the euro. Our thought is that the gain is occurring
because the big boys and girls are piling into a lower euro trade as it is the
only place where they can put a lot of money to work with great liquidity. When
the euro was initiated it traded at $0.75 to the dollar and moved up over the
next eight years to a premium of one euro equaling $1.50. The nature of markets
suggests that at some point the euro has to retrace its upward move. We now
there are economic ramifications for U.S. companies that do a large European
business s but we thought that is why the banks created all the wonderful
currency hedging derivatives for companies to use- silly us.
*****

Financial writers have to write stuff every day to sell
papers and to get folks to watch their programs. Cable and radio talking heads
have to say stuff every day and negative talk draws an audience of usually over
65 folks with nothing better to do. Negative news sells. Traders have to trade
and they talk their books. If the easy trade is to the downside they talk the
downside up. Every crash is followed by years of predicting a further crash by
the folks who didn’t see the first one coming. Markets that rally 80% from
their lows with only three 9% corrections probably need a greater one and some
real drama before they can resume their climb. The economy is recovering but
not in a manner that makes the news encouraging. Moreover the tenor of the
current media circus is to stress the negative at the expense of the positive.
The world is not ending. And the markets are experiencing a normal correction.
For a correction to work fear needs to be created.*****

General Motors made $865 million in the first quarter as
strengthening sales and savings won through bankruptcy helped drive to auto
maker to its first quarterly profit since 2007. The results compare to a year
earlier, when GM lost $6 billion as it slid into bankruptcy. GM made an
operating profit of $1.2 billion and generated $1 billion in cash. Global
revenue grew 40% from a year ago to $31.5 billion, as the auto maker increased
production 57% world-wide from a year ago.
*****

On one of our market websites we
read that more money managers than ever now own gold. That makes a lot of sense
(NOT!) since gold is at an all time high and has doubled in price in the last
five years. Of course CNBC is spending the day talking about gold as an
investment. Since money managers only have 2% to 5% of their assets in gold we
wonder their thought process. If they think gold is going to double in the next
few years then they should have a lot more of their assets in gold in order to
have any effect on their portfolios. But if they really think gold is going to
double they probably should be eliminating equities since the only way gold
will double quickly is if the markets crash. Decisions,
decisions.*****

A picture is worth...
Most of us head the vending
machine when we want a soda or a candy bar. But if you're rich in Abu
Dhabi, you may use it in a whole new way - to get gold. The Emirates Palace
Hotel in Abu Dhabi has installed "gold to go, the world's first gold
vending machine," according to a statement from the German company that
makes the machines, Ex Oriente Lux
AG. Not only does the machine dispense gold, it's
exterior is plated in gold. "In addition to one-gram, five-gram and
10-gram bars of gold, the machine also dispenses gold coins," the
statement read. Because the price of gold is constantly rising and falling, the
machine updates the rates constantly. "This eliminates the risk premiums
usually associated with precious metal trading," the company said.
Read more:
http://www.nydailynews.com/money*****

On Crash day May 6 the S&P
500 closed at 1128. On Friday May 7 the S&P 500 closed at 1110. On Monday
May 9 the S&P gapped higher by 4% and the reaction down since last Thursday
is the process of closing that gap. After opening higher stocks reversed after
9 AM and are trading down 1.5% at 11:30 AM with the S&P 500 at 1120.
Another 1% down will do the trick.

The gap will be filled and
hopefully traders will do so in the next day with a turnaround tomorrow
afternoon. That is our guess and hope but...
*****

Crude futures fell to their lowest level
this year on Monday, hit by doubts about future oil demand amid fears about the
pace of the global economic recovery. Light, sweet crude for June delivery
settled $1.55, or 2.2%, lower at $70.06 a barrel on the New York Mercantile
Exchange.

European markets ended little changed as
the day's gains evaporated, while ongoing fears about the euro zone's economic
growth prospects sent the euro to a four-year low against the dollar.

Gold was down $4 at $1223.
*****

The DJIA was up 40, down 180, down 40,
down 90, up 20, down 30 and closed up 10. The S&P 500 rose 1 to 1135. The
NAZZ gained 5. It would be nice (but with today’s close it doesn’t look probable) if there would be a downside move
Tuesday morning to touch the 1110 number since if there isn’t the S&P 500
may have to revisit that level in the future and any rally will be suspect.
Breadth was 3/1 negative on the NYSE and 5/4 negative on the NAZZ and volume
was moderate.*****

May 14, 2010

It’s a good thing nothing eventful occurred in the markets while we
were away.
*****

When we left the only positions we owned in accounts were
Ford warrants. Those acted well for three days and we were masters of the universe. But, instead of taking our singles
victory, we deduced that a home run was in the cards when earnings would be reported.
Oops, no home run and we were lucky to exit the warrants with a manageable
scratch to minor loss.

Of course we were comforted to be in cash when the
Thursday 10% Crash and mini recovery occurred. The reasons for the Crash are
confusing but it had something to do with computer trading.

The total down from April’s top of 11% is most of what we
were looking for over the next few months. 10% is the most of any
corrections since the rally began in March 2009.

Because of the rally back our thoughts upon returning
were to buy some of the companies we sold 15% to 25 % higher a month ago.

Unfortunately there was a 4% gap created by Monday’s huge
rally that may eventually be filled. We thought there would be a tradable rally
before that gap fill occurred.

Pre-market and
overseas trading this Friday morning coupled with yesterday’s action suggests
that some traders want that gap to be filled in the next few days. Moreover a
large down day today will set up talk of a Monday Crash and there are no Big
Wig Meetings scheduled in Europe this week end to give traders a bullish hat to
wear Monday morning. Trader talk is concentrating on the arguments Germany and
France are having over the euro. Some feuds never die.

With the markets
in such flux we are going to be quick on the trigger as we try to negotiate the
minefields while reestablishing positions in stocks we want to own and trade and so we are going to sell
some of yesterday’s purchases to get most accounts back to a 30% invested
posture. The stocks we are selling are the ones we bought for a 10% or less move and the extra cash will give us comfort.

As in all volatile periods flexibility is the watchword.*****

Nvidia reported better-than-expected results, but the graphics
chipmaker's sales forecast for the current quarter was below Wall Street's
target, and shares fell 3 in extended trading on Thursday.

For the July quarter, Nvidia
forecast that revenue would fall 3 to 5 percent from the previous period,
implying sales of $950 million to $970 million. That compares with Wall
Street's estimate for revenue of $990 million. Nvidia forecast gross margins of
46 percent to 47 percent, which was above the consensus target of 45 percent. We added more shares.
*****

U.S. retail sales rose a seasonally adjusted 0.4% to $366.4 billion in
April, the seventh straight increase and the 12th gain in the past 13 months,
led by strong sales at hardware stores and garden centers, the Commerce
Department estimated Friday.

*****

Words of Wisdom from Diane
Swonk:

Industrial Production Rebounds
in April

Industrial production surged
0.8% in April after rising only 0.2% in March. Gains were fairly broad-based as
firms worked to replenish inventories, repair and replace dilapidated equipment
and respond to strong export demand.

Revisions since the start of
the year show that the rebound in production was slightly weaker than initially
reported. The more pertinent question is what the recent turmoil in
Europe will mean for exports - which are a critical component of the lackluster
recovery. The direct effect on exports to Europe is expected to be small, as we
are now relying more on demand from the developing economies than Europe for
our equipment - largely construction equipment. The issue there is that the
recent strength in the value of the dollar is undermining our competitiveness
relative to Europe. The only good news is that lags in changes in the dollar
and how they affect exports are extremely long - 1-to-2 years - and the
worst of the dampening effect that a stronger dollar will have on exports is
not likely to occur until late 2011, when the recovery is (hopefully) on
stronger footing.

The Bottom Line: Manufacturing
activity has picked up from the excessively-low levels experienced during the
recession, and momentum appears to be building. That said,
it will still take a very long time for us to return to pre-recession highs.
Moreover, there is still a lot of idled capacity and most producers remain
reluctant to bring too much back online until they feel more certain about the
durability of the recovery.

Retail Sales Slow but Solid in
Wake of Easter Holiday

Retails sales rose 0.4% in
April - slightly better than expected - after surging an upwardly-revised 2.1%
in March. The slowdown in spending in the wake of the Easter holiday
was pronounced, with apparel sales actually declining on a month-to-month
basis.

The biggest surprise in today's
report came in vehicle and parts sales, which increased on a dollar basis
despite a reported decline on a unit volume basis. This typically means that
sales to consumers were stronger than sales to businesses, which are not
included in the retail sales data. It also suggests that the vehicles sold were
at the higher end of the market, which is consistent with other data showing some
comeback in spending at the luxury end of the market, and the inability of
middle-income buyers to get financing in this environment (i.e., the bulk of
vehicle sales are now concentrated among the highest income earners, who either
can qualify for the limited financing available or can pay cash for their cars;
a similar phenomenon is occurring in the housing market).

Another point of interest
includes online sales, which continue to grow as a share of the total, but are
highly sensitive to changes in the weather and gasoline prices. People are much
more eager to shop online when the weather is bad and gas prices are high.

Later today, the preliminary
survey of consumer sentiment is scheduled to be released. In general, the index
is expected to continue to gradually improve on the heels of a slightly better
jobs outlook. Anecdotal reports suggest that new college grads are starting to
get more offers and, earlier in the week, small businesses showed some signs of
thawing in their plans to hire - which plays a critical role in generating
jobs in the economy.

The Bottom Line: Consumers are
spending again, but with caution. Moreover, the spending they are doing is
being supported by a reduction in saving, pent-up demand among high-income
households and extensions to unemployment insurance. Going forward, a return of
salary raises, moderate employment gains and a reinstatement of bonuses will
keep consumer spending up, but without access to credit, we can't expect
consumers to be the Atlas they once were for the U.S. and the rest of the
world.

*****

The 200 day moving
average on the S&P 500 is at 1100. With the S&P 500 at 1135 traders
have an eye on that level as the place to test? That is 3% lower for an S&P
500 that is already down 2% today but it looks like the big boys and girls want
to move us a lot lower before the close. To fill the gap the S&P 500 has to
go to 1110 which is last Friday’s close.

Volume is much greater on down
days than up days. That is not good news for the bulls. Oil ended under $72
while Gold was $1223. The euro ended at $1.23 o its way to parity with the
dollar.

*****

Well so much for
our first day back. Programmers brought the DJIA back 1% in the final hour but
the major stock measures still closed almost 2% and more lower in active
trading. Breadth was 8/1 negative. Monday should be interesting. We don’t see a
2009 crash in the cards but there looks like there is more work to do on the
downside. These corrections-and rallies- are becoming more compressed in time
as the big boys and girls play their games. We are just trying to survive and
profit without being flattened by their programs.

May 5, 2010

May 4, 2010

May 3, 2010

Returning on May 14, 2010

We are taking the next three weeks off to
travel to Florida to pick up our cycling wife and to spend some days resting from
the arduous journey- our drive down and Katie’s 3200 mile cross country bicycle
trek.
We will return on May 14.
This is our first three week vacation since
college and we need it. There will be no posts although –as always- we will be
keeping aware of market conditions- and the Model Portfolio will be updated
daily.

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Website Information

For those folks who have accounts with us, you may now go to:
https://eview.mesirowfinancial.com
and fill out the account information and view your accounts online. If you
have trouble filling out the form, or in getting online, call and we will
help you with the process. NASD regulations require the eview
site to be secure. Thus your password must be changed every ninety days.
You will be prompted to make this change when needed.

Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors Act, we are pleased to offer to send to you
our updated Form ADV, Part II for your perusal. If any present client would like a copy, please don't hesitate to write, e-mail, or call us.

A list of all recommendations made by Lemley Yarling Management Co. for the preceding one-year period is available upon request.

The factual statements herein have been taken from sources we believe to be reliable but such statements
are made without any representation as to accuracy or completeness or otherwise. From time to time the Lemley Letter, or one
or more of its officers or employees, may buy and sell as agent the securities referred to herein or options relating thereto, and may
have a long or short position in such securities or options. This report should not be construed as a solicitation or offer of the purchase
or sale of securities. Prices shown are approximate. Past performance is no indication of future performance.